As usual, I have been saving links waiting to write a piece de resistance. Instead, I’ll give hors-d’ouevres….

==> In this post Scott Sumner riffs on a recent Krugman post. Did you have any idea that Sweden ran a budget surplus of 2% of GDP in 2011? Me neither. Reading Krugman certainly did give me any reason to suspect that. Krugman had produced a chart and implied that the United States was engaged in more austerity than Sweden. Go look at his post. He calls it “spending side austerity” presumably to cover his bases. But it’s not like he says, “Oh, admittedly, Sweden is running a budget surplus, but I’m saying that’s because of their loose monetary policy which has boosted revenues and allowed them to reduce transfer payments…” No, none of that. He just implies that conservatives are insane, puts up an irrelevant chart, and then gives a very misleading analysis of it.

==> Sumner’s fun with Krugman is in line with Russ Roberts’ sarcasm from a week ago (HT2 von Pepe). The big picture is that in order to make the European situation fit his rhetoric, Krugman has decided to reclassify the relevant item as being government spending on consumption and investment, as opposed to all government spending (including transfer payments). That’s the trick he pulled to try to paint Sweden as being more profligate and “Keynesian” in the slump than the US, even though Sweden is currently running a budget surplus (or at least did in 2011). And he earlier did it in order to impugn the chart that Veronique de Rugy had assembled. (And I use the verb “impugn” with conviction. Go read how Krugman bit her head off, for having the audacity to chart a bunch of government spending figures in a debate over government spending.) Here’s a good summary of Krugman’s new rhetorical trick, in his own words:

…some people who should know better are conceding the point that maybe there haven’t been big spending cuts. Yes, there have.

For the fact is that you can’t just look at spending levels to ask what is happening to spending programs. Here in the United States spending on unemployment insurance and food stamps has risen sharply, not because the welfare state has expanded, but because a lot more people are unemployed and poor. Similar effects are at work in European countries, which have stronger safety nets than we do. Also, some spending represents banking bailouts, not exactly what people have in mind when they talk about big government.

And here’s how Russ responded:

I get it. An increase in spending that doesn’t reflect a desire for bigger government but instead reflects automatic stabilizers, say–well, that’s not a spending increase. It’s the intention that counts when you evaluate the impact on aggregate demand.
…
Silly me. I didn’t realize that in the Keynesian model it isn’t government spending that affects aggregate demand, but only certain kinds of government spending. Krugman goes on to show that much of the increase in spending in Ireland is due to bank bailouts and increases in transfers because of the “dire state of the Irish economy.” But I thought those transfers were supposed to stimulate the economy. Joseph Stiglitz taught me that it doesn’t matter what government spends money on, it’s all stimulus. And when Krugman was touting a two trillion stimulus package, I don’t remember hearing the part about making sure it was pushed through with the right kind of spending and the right kinds of motives. Who knew that government spending only stimulates when it springs from a desire for bigger government?

==> Last point I want to make: After seeing the actual spending figures (that de Rugy had compiled), my confidence in my own position went down. In other words, the European governments had slowed or reduced their nominal spending more than I would have guessed.

The irony here is that I was only really familiar with the UK’s figures, and that was the one Krugman had been harping on (saying the UK’s double dip was the death blow to austerity). I saw that the UK spending at best had merely tapered off, and so I assumed that other states (except Greece and Ireland) had probably just cut the rate of growth. I was actually surprised by how many had lower total nominal spending levels in 2011 than in 2010.

So I think Krugman should have simply said, “Yes, this is too austerity, spending went down. Now are you conservatives trying to say, ‘Oh it wasn’t big enough’? Are you kidding me? You didn’t like it when I said the same thing about the Obama stimulus package, so don’t you dare try to pull that move on me, now.”

That would have been a decent move for him to make. Instead, he throws up this nonsense point about the composition of spending. That issue could conceivably be relevant when evaluating claims like “Obama is a Big Government Man who grew the welfare state,” but it’s hardly relevant to evaluating whether demand-side policies are good at restoring economic growth.

Just to warn you, kids, I have a double shot of Krugman critiques being published next week in different outlets. After that, I really think I have to stop jumping up and down every time Krugman says something ridiculous and incredibly misleading. The novelty is wearing off.

UPDATE: David R. Henderson has some good thoughts on all this, too. He points out that whenever the debate came up over extending unemployment benefits, Keynesians touted the benefits to stimulating demand.

32 Responses to “Thoughts and Links on the Austerity Debate”

No, the novelty is not wearing off. There is a reason Hayek wished he would have went after Keynes on The General Theory. You don’t let charlatans get away with being charlatans. All your detractors aside we need more people pointing out the absurdities like this.

Could somebody explain to me what was so great about Russ’s post? He neglected to quote the most important parts, and as far as I could tell Krugman’s charts were fine. He showed that if you take a look at what that spending was, and take out spending on the banks (which I hope we can all agree is not Keynesian stimulus) Irish spending has been flat through the crisis. Flat spending for four years in a row sounds like austerity to me. It’s obviously less spending than any plausible counterfactual.

I also don’t see where he’s saying that unemployment insurance and welfare is not government spending – as Russ alleges. Could someone point that out to me? What he says is that it’s not the expansion of the welfare state – it’s the operation of the current welfare state how its intended to operate in a recession. But he never says the spending isn’t real.

I don’t understand why you were so impressed by his post Bob. I thought it was a terrible post.

btw – even if you include the spending on the banks, you still get back to 2008 levels by 2011.

Daniel there’s no mystery as to why I liked it; I quoted my favorite parts. Krugman is trying to say that in evaluating whether European countries provide a test case of the benefits of “austerity,” it’s not sufficient to look at actual government spending. Instead, we have to look at the constituents of government spending… So I think Russ rightly ridiculed that idea. It doesn’t matter what they spend money on; it could be to pay people to dig ditches and fill them back up, heck, it could even be to fend off a bogus alien invasion. Doesn’t matter, according to standard Keynesian theory.

You mocking Krugman for saying ridiculous things is as difficult as a Randian mocking Rand for saying ridiculous things.

I slapped my knee when I saw Krugman saying that we can’t just look at government spending levels when we make judgments on government spending, but rather we have to separate government spending into “not stimulative” and “stimulative.”

It’s blatantly obvious that Krugman is using a double standard. When he observes governments that spend money and he wants to say it works, he’ll say stuff like “WW2 got us out of the Great Depression.” There he makes it clear that he’ll even say war spending is “stimulative.” But when he observes Ireland, and he wants to push the story that the Irish government made big spending cuts, he’ll say that much of the Irish government spending wasn’t stimulative, because he excludes some government spending.

Why did he include all government spending in the US during the war, which included killing innocent people, as “stimulative”, but he denies Irish spending is stimulative on the basis that it was transfer payments for people in distress?

Krugman is separating government spending into “good” and “bad” when it suits his story. That’s what Russ was mocking him about. Not only because Krugman’s own stories, but because Keynesian theory doesn’t separate government spending into stimulative and not stimulative. It’s all allegedly stimulative.

He neglected to quote the most important parts, and as far as I could tell Krugman’s charts were fine.

Yes, his charts were fine. he showed the Irish government “savagely” cutting spending in 2011 to…2009 spending level.

He showed that if you take a look at what that spending was, and take out spending on the banks (which I hope we can all agree is not Keynesian stimulus)

You hope wrong! Government spending qua government spending is stimulative in the Keynesian model. You are not permitted to introduce your personal morality or subjective values and separate government spending into stimulative and not stimulative. If we did that, then the billions of individuals around the world would have their own fully justified position on what is stimulative government spending and what is not stimulative government spending.

Irish spending has been flat through the crisis. Flat spending for four years in a row sounds like austerity to me. It’s obviously less spending than any plausible counterfactual.

See this is the problem with the Keynesian buzzword “austerity”. Keynesians cannot even agree on what it means! It almost seems like it is deliberate, so that a Keynesian individual can always reserve for themselves the final judgment on when austerity occurs and when it doesn’t.

You’re saying austerity occurs when government spending remains flat for 4 years, let’s say a number of years so as to not limit ourselves to some arbitrary number. Since we’re all defining austerity any way we want, then I’ll define austerity as a decrease in government spending relative to total spending.

If we define austerity that way, then the Irish government was the opposite of austere, because a constant government spending in the presence of declining total spending, makes government spending relative to total spending increase.

I also don’t see where he’s saying that unemployment insurance and welfare is not government spending – as Russ alleges. Could someone point that out to me?

It’s not that Krugman is explicitly saying those expenditures are not government spending. It’s that he’s saying there were big spending cuts in Ireland if we ignore unemployment, food stamps, and bank bailout spending.

In combination with “Yes, there have been big spending cuts”, what else is it but a an tacit argument that unemployment and food stamps and bailouts are not government spending?

What he says is that it’s not the expansion of the welfare state – it’s the operation of the current welfare state how its intended to operate in a recession.

How can you reconcile this with Krugman’s claim “Yes, there have been big spending cuts”?

The only way there could be big spending cuts, is if and only if welfare spending increases is not government spending increases.

Russ correctly pointed out that the implication of this is that to Krugman, government spending is only government spending when it is intended to grow the state. If it’s just the same current sized state, and the state spends more on unemployment benefits, food stamps, and whatnot, then it doesn’t really qualify as government spending increases. It seems only when new state employees are hired, when new projects are started, etc, spending that is in addition to the “automatic stabilizer” type spending, somehow qualifies as government spending.

But he never says the spending isn’t real.

He said it indirectly in his patented passive aggressive style.

I don’t understand why you were so impressed by his post Bob. I thought it was a terrible post.

I guess you have to be a non-acolyte to appreciate it. I did. Tremendously. It was a great post.

btw – even if you include the spending on the banks, you still get back to 2008 levels by 2011.

“hat’s the trick he pulled to try to paint Sweden as being more profligate and “Keynesian” in the slump than the US, even though Sweden is currently running a budget surplus (or at least did in 2011).”

The fact that Sweden is running a budget surplus now is a demonstration that there stimulus worked: they passed a large stimulus package in 2008, which continued in 2009 and 2010:

Australia is yet another country which went for a moderate stimulus in 2008, 2009 and 2010, never even had a recession because of its quick fiscal expansion, and with some minor cuts now has been able to run a surplus.

I think the articles you link to support Dr. Murphy’s claims against Dr. Krugman.

According to those articles I read that Sweden spent roughly 2 % and 1.5 % of its GDP on stimulus packages in 2009 and 2010. Call its total spending on fiscal stimulus (less ‘automatic stabilizers’) roughly 3.5% of its GDP.

The US passed the ARRA in Feb 2009, which I calculated as costing roughly 5.5% of its GDP ($787B vs. GDP of ~$14,00B).

So, I would say Dr. Murphy’s point stands; that Dr. Krugman’s portrayal of U.S. fiscal policy as being “austere” compared to Sweden was misleading.

“The US passed the ARRA in Feb 2009, which I calculated as costing roughly 5.5% of its GDP ($787B vs. GDP of ~$14,00B)”

This is a ridiculous error you’ve made.

The stimulus was $821 billion over 10 years, and about 70% had been spent by the end of September 2010. That is roughly $300 billion in 2009 and $300 billion in 2010. This was in a roughly $14 trillion US economy (or $14.25 trillion [2009 est.] and $14.66 trillion [2010 est.]), so that overall size of the stimulus in each year is roughly 2% of GDP .

Leave it to a Keynesian cultist to spin budget surpluses into evidence that government spending works.

If they were instead running a deficit, it means government spending works. If they are running a surplus, it means government spending works. If the state spends an extra $1 billion in 2008, $5 billion in 2009, and $7 billion in 2010, and the economy slumps, it means there was not enough government spending because government spending works. If the economy does not slump, it means government spending works.

If the US government spends more relative to US GDP than the Swedish government spends relative to Swedish GDP, and Sweden and the US both slump, it means there was not enough government spending in both countries because government spending works. If Sweden slumps more than the US, it is because there was not enough government spending in Sweden because government spending works. If the US slumps more than Sweden, it means there was not enough government spending in the US because government spending works. If neither slump, then it means government spending works.

Regarding Australia, Australia hasn’t gone through a major (needed) correction because their central bank accelerated their money printing, which we observe as “stable” increasing nominal aggregate spending.

Government spending only seems to “work” when it is accompanied by money printing.

“If Sweden slumps more than the US, it is because there was not enough government spending in Sweden because government spending works.”

Neither Sweden nor the US “slumped” when their stimulus packages were implemented: both saw their GDP contractions reverse and real output growth was restored, as did Norway, South Korea, New Zealand, France, Germany, the UK, Canada, etc etc.

It takes a special type of Austrian cultist to deny empirical evidence.

Norway, South Korea, New Zealand, France, Germany, the UK, Canada prosper DESPITE government spending, not because of government spending.

In order for your judgment of what happened in these countries to be true, we have to first accept that government spending helps economies. No, it doesn’t. It only helps some people at the expense of others in the short term, and brings everyone down in the long term.

The problem isn’t money “spending”, it’s what the money is spent on. Governments use coercion when they spend, markets use consent. You’re asking me to join your cult of believing that coercion is superior to consent.

I know it looks that way, and as I was writing it I was thinking it might be interpreted that way, but money printing postponing correction, which has the side effect of nominal spending not falling, is consistent with ABCT. The Sumnerian would say NGDP not falling is a causal force in eliminating past errors, whereas I would say it can only kick the can down the road whilst introducing new errors. The Sumnerian would deny that.

“Sweden didn’t slump when the Swedish government reduced its spending.”

Apart from which, no Keynesian has ever said that contractionary fiscal policy is a problem, if the private sector is booming – providing the necessary investment and consumption spending – or you have an export boom as well. In fact, that is precisely the other side of demand management.

When governments around the world first started to adopt Keynesian economic principles during the Second World War, and they did so to control inflation and excessive aggregate demand, by contracting demand when wartime command economies had been implemented (a point also once made in a similar way by Ludwig Lachmann).

Apart from which, no Keynesian has ever said that contractionary fiscal policy is a problem, if the private sector is booming – providing the necessary investment and consumption spending – or you have an export boom as well.

False. You ignore Keynesian cultist Paul Samuelson who predicted another Great Depression when he contemplated the effects of government cutting its spending after the war in 1946.

He never said anything about private sector spending increasing. He just considered the government cutting its spending, and in his Keynesian cult chanting, spewed the mantra that the economy would slump.

When governments around the world first started to adopt Keynesian economic principles during the Second World War, and they did so to control inflation and excessive aggregate demand, by contracting demand

False again. Governments were already using cultist Keynesian economic principles prior to the war. As Nobel laureate Hayek pointed out, cult founder Keynes just “introduced” a theory that justified what governments were already doing by then.

Australia as well as new zealand is clearly riding on the back of china.we are being export lead. notice both countries have a spit economy exports driving growth the domestic economy is a lot slower.Melbourne vrs perth as a example.new zealand is a great historical example of austerity during the early 1980s new zealand had embarked on a massive stimulus policy know as think big(the building of dams ect just what krugmen wants) low and behold we faced bankruptcy at the end.from 1987 to 1992 trade was liberalized interest rates increased to tackle inflation government spending slashed to the point of surpluses being able to take down dept.it not a easy process just like paying off a credit card.but new industries appeared like tourism replacing jobs and a bit more lost from government cuts.despite the fact that tradition industries from farming ect were struggling with low good prices.i struggle to see how the productive industries thad led growth could come about if we continued think big. a policy that maintained jobs in non profitable enterprises increased bond prices and denied the market to find its own organic equilibrium.

Very funny on Australia .We handed out free money that just went straight to the pokies! We were already riding a China boom which extended with their massive stimulus post GFC and we had no real subprime just a more inflated housing bubble than the US which now still needs correcting but cant because free money is seeing investors reprice again at the expense of the middle class Instead we developed a 2 speed economy with ex resources in recession . Love OZ but we are generationally plundering resources for a small few and ex mining just a consumer economy with no manufacting. With a stupid USD caused high AUD we are now just one big carry trade with free USD Yen all overpaying for yield . Global artifical bond construct has baby boomers piling into wrongly priced equity yields and will go over the cliff and be worse off down the road THANKS FED

This discussion is going to go nowhere since we obviously have different definitions of austerity. Of course, austerity has no definition in economics so I look forward to all our positivists proving something that has no meaning.

As MF points out, Australia as a victory for the keynsians? Besides MF’s point I would mention stimulus and monetary crankery work when the underlying economy is actually producing lots of stuff and exporting.

Austrian want the U.S. to recover by producing stuff and not by manipulating NGDP or G.

Speaking as someone who has more of a background in the physical sciences and is trying to learn more about the different ideas in economics, I find these debates somewhat frustrating. I get the impression that all of the good science is done more at the micro-economic level and that much of macroeconomics is a pseudo-religious debate. The different schools of thought can’t even seem to agree on the definitions words half the time.

Here’s what I want to know. How would you go about disproving your own models? It’s relatively easy to go mining for data that supports whatever theory you have but what is commonly accepted as the mark of good science in this day in age is the ability to put your ideas out there to be falsified by the evidence. What I would find really compelling in this debate would be if someone could say:

“If my model of economic downturns and recovery were NOT accurate we would expect to find an economy with characteristics X,Y, and Z that behaved in way A and the results were B”

And the opposition were unable to find an instance in which X, Y, Z, A, and B were all true. Perhaps that’s a bit much to ask for when we’re looking at a systems as complex as national economies, but I’d still be interested to know if someone can do that.